In 2012, several judicial opinions have reminded directors, officers and “responsible persons” that personal liability may be imposed for business taxes. See our alert from June 20, 2012. Responsible persons are reminded again that not only will authorities impose liability for unpaid taxes of a business on individuals but that the imposition of such taxes may not be dischargeable in bankruptcy. Frequently, when discussing personal bankruptcy matters with directors, officers and other employees who may be liable for unpaid taxes, a potentially responsible person may consider only his or her personal taxes and not those that may be imposed on that individual for vicarious liability of a business.
In the most recent case, the Michigan Tax Tribunal (MTT) determined that a taxpayer’s assessment for a company’s unpaid state taxes as a corporate officer was not dischargeable in bankruptcy (Paul A. Henderson v. Mich. Department of Treasury, Mich. Tax Tribunal, Dkt. No. 431375, 08/24/2012). Michigan’s Single Business Tax (SBT) imposed vicariously on a corporate officer was not dischargeable in bankruptcy because, under 11 U.S.C. § 507(a)(8)(E), it was a non-dischargeable excise tax.
The taxpayer, Paul Henderson, was a manager or member of Jefferson Beach Properties, LLC, a company which did not satisfy its 2007 SBT taxes. The tax return for the taxes at issue was more than three years before the date of the filing of the taxpayer's petition in bankruptcy, which would mean that qualifying taxes generally would be dischargeable under 11 U.S.C. § 507(a)(8)(E). The MTT reasoned that the SBT is a tax upon the privilege of doing business in Michigan measured by an adjusted tax base of persons conducting such business activity in Michigan. The MTT drew an analogy between the SBT and the Texas franchise tax, which a federal bankruptcy court previously held to be a privilege tax on a transaction. The MTT also referenced a federal district court holding in Michigan, Quiroz v. State, U.S. Dist. Ct., E.D. Mich., Dkt. No. 11-CV-12672, 03/27/2012, which held that an officer liability assessment arising from a corporation’s failure to pay SBT was a debt for a non-dischargeable excise tax on a transaction under 11 U.S.C. § 507(a)(8)(E). Because the MTT was asked to determine whether the taxpayer’s officer liability fell within the scope of the U.S. Bankruptcy Court for the Southern District of Florida discharge order under 11 U.S.C. § 523(a), the MTT held that the Florida bankruptcy court would have come to the same conclusion as the court in Quiroz. The MTT also held that, while Henderson is not the “taxpayer” that initially incurred the tax liability, he is liable for payment of the tax under Mich. Comp. Laws Ann.§ 211.27a(5), and so is a taxpayer. The debt that the taxpayer in this case listed on his bankruptcy schedule is a debt for a tax, which the taxpayer became liable to pay by virtue of the officer liability statute.